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However defined, equilibrium is typically conceived as a state from which there will be no endogenously-generated tendency to deviate. And as noted by Setterfield (1997b): What this suggests . . is that, once we are in equilibrium, history effectively ends; the future is predetermined by the time path corresponding to the equilibrium that has been achieved. The sequence of outcomes of which this time path is composed does not ‘matter,’ because the absence of any endogenous tendency to change dictates that it cannot affect the subsequent outcomes of the system in any way that would cause deviation from the equilibrium time path.
1956), ‘Economic growth and capital accumulation’, Economic Record, vol. 32 (November), pp. 334–61. Woodford, M. (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton: Princeton University Press. 2 Path Dependency, Hysteresis and Macrodynamics Mark Setterfield* Trinity College, Hartford, CT Abstract This chapter explores the meaning and application of concepts of path dependency in macrodynamics, with a particular focus on hysteresis. It is argued that hysteresis is a particular type of (rather than a synonym for) path dependency, and that the concept emerges from features of the adjustment dynamics of economic systems, rather than the nonuniqueness of equilibrium.
Mark Setterfield 39 2. Path dependency, hysteresis and model ‘organizing concepts’ i) What is path dependency? All formal models are constructed around ‘organizing concepts’, the most common example of which in macrodynamics (and economics in general) is the concept of equilibrium. Organizing concepts make an important contribution to the architecture of formal models, in the context of which macrodynamic theories are usually articulated. 2 Broadly speaking, a dynamical system displays path dependency if earlier states of the system affect later ones – including (but by no means limited to) anything that can be construed as a ‘long run’ or ‘final’ outcome of the system.
